Edited version of private advice

Authorisation Number: 1052300681965

Date of advice: 4 September 2024

Ruling

Subject: CGT - company title

Question 1

Are the interests in the shares in the company the relevant CGT asset for the purposes of section 104-10 of the ITAA 1997?

Answer

Yes.

Question 2

Is the acquisition date of the entirety of the interests in the shares held by Person A at their death the original date of purchase in YYYY?

Answer

No, only 50% of the interest in the shares are taken to be acquired at that time.

Question 3

Can the third element costs associated with holding the shares be added to the cost base of Person A's interest in the shares taken to have been held prior to the death of Person B in YYYY?

Answer

No.

Question 4

Can the third element costs associated with holding the shares be added to the cost base of Person A's 50% interest in the shares taken to have been acquired on Person B's death in YYYY?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 19XX

Relevant facts and circumstances

Person A purchased a unit jointly with their spouse, Person B, the unit was company titled meaning they owned a number of shares in the company that entitled them to use and occupy the unit.

The share certificate shows that Person A and Person B became the registered holders of a specified number of shares in the Company.

The articles of association of the Company state that the holder of a group of shares shall have the full right to occupy a flat in respect of which such group of shares is held.

The unit was used as a holiday home and was never used to produce assessable income.

Subleasing was not allowed under the Company's articles of association

The charges/fees listed in the articles of association states that the directors have the right to make a levy on the shareholders in the Company provided that the levy doesn't exceed the sum required to meet the expenses, charges and outgoings. Each shareholder is only liable to contribute on the basis of their shareholding portion.

Person B passed away and Person A engaged a solicitor to transfer Person B's interest in the shares to the Person A.

Person A passed away approximately XX years after Person B.

The shares were sold by the executor of Person A's estate.

The share price upon sale was based on the market value of the property as estimated by a registered agent.

The trustee is seeking to add the following costs to the cost base:

•         Strata levy (50% from date of Person B's death)

•         Council Rates (50% from date of Person B's death)

•         Repairs and maintenance (50% from date of Person B's death)

The Articles of Association of the Company states that failure of a shareholder to comply with the conditions and financial responsibilities provided for in the articles may result in the shares in the company being forfeited.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 108-7

Income Tax Assessment Act 1997 subsection 110-25(4)

Income Tax Assessment Act 1997 section 115-5

Income Tax Assessment Act 1997 section 115-10

Income Tax Assessment Act 1997 section 115-15,

Income Tax Assessment Act 1997 section115-20

Income Tax Assessment Act 1997 section 115-25

Income Tax Assessment Act 1997 section 128-50

Reasons for decision

Question 1

Are the interests in the shares in the Company the relevant CGT asset for the purposes of section 104-10 of the ITAA 1997?

Summary

Yes, the CGT assets owned by Person A are the shares in the Company.

Detailed reasoning

A CGT Asset is relevantly defined in subsection 108-5(1) of the ITAA 1997 as:

(a)         any kind of property, or

(b)         a legal or equitable right that is not property

as well as part of or an interest in either (a) or (b).

Note 1 to subsection 108-5(2) further provides that shares in a company are an example of a CGT asset.

The Commissioner has ruled in Taxation Ruling 94/30 Income tax: capital gains tax implications of varying rights attaching to shares (TR 94/30) at paras 32 to 33 that the relevant CGT asset is the share itself and not its constituent rights.

For this reason, the occupancy rights to the property that form part of the share rights are not considered a separate CGT asset.

Question 2

Is the acquisition date of the entirety of the interests in the shares held by Person A at their death the original date of purchase?

Summary

No, Person A acquired a 50% interest as joint tenant when the shares were purchased jointly with Person B. When Person B passed away, Person A acquired Person B's 50% interest and therefore Person A's acquisition date for that later interest is Person B's date of death. This is due to the operation of section 108-7 of the ITAA 1997.

Detailed reasoning

Section 104-10 of the ITAA 1997 explains that CGT event A1 only happens if you dispose of a CGT asset. 'Disposal' is defined for CGT purposes to mean only those situations where there is a change of ownership of the asset from you to another entity.

Section 108-7 of the ITAA 1997 provides that individuals who own a CGT asset as joint tenants are treated as if they each owned a separate CGT asset constituted by an equal interest in the asset and as if each of them held that interest as a tenant in common. This means, for example, that if 100 shares were purchased jointly by two individual joint tenants, each joint tenant is taken to have a 50% interest in each share, rather than each joint tenant owning 50 shares.

This was considered in Johnson v FC of T 2007 ATC 2161 (Johnson's case), where Senior Member McCabe reasoned:

Section 108-7 provides that individuals holding a CGT asset as joint tenants are treated as if they were tenants in common who each owned a separate CGT asset comprising an equal interest in the asset. Meaning in this case that each share was compromised of two assets, one held by each other.

and:

that having a one-half interest in a parcel of shares did not equate to having exclusive ownership of one half of the total number of shares.

Section 128-50 of the ITAA 1997 provides the following in relation to what happens when a joint tenant dies:

(1)         This section has rules that are relevant if a * CGT asset is owned by joint tenants and one of them dies.

(2)         The survivor is taken to have * acquired (on the day the individual died) the individual's interest in the asset. If there are 2 or more survivors, they are taken to have acquired that interest in equal shares.

(3)         If the individual who died * acquired his or her interest in the asset on or after 20 September 1985, the first element of the * cost base of the interest each survivor is taken to have acquired is:

Cost base of the interest of the individual who died

(worked out on the day the individual died)

Number of survivors

Example: In 1999, 2 individuals buy land for $50,000 as joint tenants. Each one is taken to have a 50% interest in it. On 1 May 2001 one of them dies.

The survivor is taken to have acquired the interest of the individual who died on 1 May 2001. If the cost base of that interest on that day is $27,000, the survivor is taken to have acquired that interest for that amount.

Section 115-25 of the ITAA 1997 states:

(1) To be a discount capital gain, the capital gain must result from a CGT event happening to a CGT asset that was acquired by the entity making the capital gain at least 12 months before the CGT event.

Item 3 of the table in section 115-30 of the ITAA 1997 states that for the purpose of the CGT discount covered in sections 115-5, 115-10, 115-15, 115-20 and 115-25, the legal personal representative of a deceased individual is taken to have acquired the CGT asset when the deceased acquired the asset.

Application to your circumstances

Person A and Person B jointly held the shares in The Company as shown by the original share certificate citing both of their names as owners. Under section 128-50 of the ITAA 1997 which provides for what happens when a joint tenant dies, Person A is taken to have acquired Person B's interest in the shares when Person B died. Therefore, Person A is taken to have acquired a 50% interest on the original purchase date, and a further 50% on the date Person B died.

Item 3 of the table at section 115-30 of the ITAA 1997 operates so that the trustee for the Estate of Person A (the Trustee) is taken to have acquired the CGT asset when Person A acquired the asset for purpose of the CGT discount calculated under Division 115-A of the ITAA 1997. As Person A acquired their original interest on the original purchase date, and Person B's interest when Person B died, the Trustee as the legal personal representative (LPR) is taken to have acquired the asset more than 12 months before the relevant CGT event occurred, being the disposal of the shares in the Company by the LPR. This means the LPR will be eligible under section 115-25 of the ITAA 1997 for a discount capital gain.

Question 3

Can the third element costs associated with holding the shares be added to the cost base of Person A's interest in the shares taken to have been held prior to the death of Person B?

Summary

No, as Person A acquired that 50% interest before 1991, subsection 110-25(4) of the ITAA 1997 prevents third element costs from being added to the cost base.

Detailed reasoning

Subsection 110-25(4) of the ITAA 1997 states:

(4)         The third element is the costs of owning the CGT asset you incurred (but only if you acquired the asset after 20 August 1991). These costs include:

(a)          interest on money you borrowed to acquire the asset; and

(b)          costs of maintaining, repairing or insuring it; and

(c)          rates or land tax, if the asset is land; and

(d)          interest on money you borrowed to refinance the money you borrowed to acquire the asset; and

(e)          interest on money you borrowed to finance the capital expenditure you incurred to increase the asset's value.

This specifically excludes costs incurred related to owning an CGT asset that was acquired prior to DD MM YYYY.

Application to your circumstances

As Person A is taken to have acquired their original 50% interest prior to DD MM YYYY, third element costs cannot be added to the cost base for that 50% interest.

Question 4

Can the third element costs associated with holding the shares be added to the cost base of Person A's 50% interest in the shares taken to have been acquired on Person B's death?

Summary

Yes, Person A is taken to have acquired Person B's 50% interest on their date of death which was after DD MM YYYY, and therefore is not excluded under subsection 110-25(4) of the ITAA 1997 from adding third element costs associated with holding the shares to the cost base of that interest from the date of acquisition (Person B's date of death) onwards.

Detailed reasoning

Subsection 110-25(4) of the ITAA 1997 states:

(4)         The third element is the costs of owning the CGT asset you incurred (but only if you acquired the asset after 20 August 1991). These costs include:

(a)          interest on money you borrowed to acquire the asset; and

(b)          costs of maintaining, repairing or insuring it; and

(c)          rates or land tax, if the asset is land; and

(d)          interest on money you borrowed to refinance the money you borrowed to acquire the asset; and

(e)          interest on money you borrowed to finance the capital expenditure you incurred to increase the asset's value.

There is no definition in the ITAA 1997 as to the meaning of "maintaining" in this context.

The CCH Australian income tax reporter has discussed the breadth of the term "maintenance" as follows:

The word maintenance has been described as " vague " and, in an appropriate context, may have a wider meaning than repair (Day v Harland & Wolff Ltd (1953) 2 All ER 387 at p 389). ... The ordinary meaning of " to maintain " is to keep something in existence in a state which enables it to serve the purpose for which it exists (Haydon v Kent County Council (1978) 2 All ER 97 at pp 108, 109).

Application to your circumstances

As surviving joint tenant, Person A is taken to have acquired Person B's 50% interest when Person B passed away. Therefore, the acquisition date for the 50% interest Person A is taken to have acquired from Person B, is Person B's date of death. The third element costs can be added on a pro rata basis to the cost base for the 50% interest that Person A is taken to have acquired after DD MM YYYY.

As the relevant asset is the interest in the shares in The Company, the costs incurred must be in relation to maintaining the shares.

The Articles of Association of The Company impose certain obligations and financial responsibilities with respect to the occupancy rights to the property that derived from the shares themselves. These include the payment of levies, rates and taxes and keeping the property in good order and repair.

The levies, council rates and costs Person B incurred in relation to maintaining the unit are within what is required as part of the conditions prescribed in the articles of association.

Failure to comply with these conditions may result in the shares being forfeited.

These costs therefore preserve and maintain the CGT asset. If they are not incurred, the CGT asset may be lost.

Such costs are therefore considered to fall within the ordinary meaning of the word 'maintenance" and therefore satisfy the testing in paragraph 110-25(4)(b) of the ITAA 1997.

50% of these costs may be included as third element costs in terms of Person A's interest taken to have been acquired from Person B at the time of Person B's death.